November 17, 2021 – In my experience as a financial life guide, there are two priorities in most clients’ lives that attract significant focus, both in time and money: children and pets. Sometimes, they are indistinguishable!
However, a parent’s obligation to nurture and prepare their children for life is unique and a responsibility not to be taken lightly. Of course, we all want what is best for our children. It is not necessarily the best clothes or the latest gadgets, or lavish vacations that make for “the best.” Rather, most parents want their children to be safe and secure, and to lay a foundation that allows them to build their own optimal life.
Along the way, there are many lessons to teach your children that will shape their values. One of the most important, but often overlooked, lessons is about money. Why might that be? Money is the fundamental medium by which our economy operates and our society integrates.
It is possible that parents do not feel comfortable helping their children become financially literate because they have difficulty with the topic.
T. Rowe Price’s 11th Annual Parents, Kids & Money Survey found that nearly half of parents said they miss opportunities to talk to their kids about money and finances. And a quarter said they are very reluctant or highly reluctant to discuss financial topics with their children. Kids, on the other hand, are eager for their parents to share their wisdom. Half of the children surveyed said they wish their parents had taught them more about money.
Your children will learn money lessons one way or another. It would help if you considered it part of your “parental responsibility” to play a role in shaping their feelings, thinking, and values about money. Here are some things to consider:
Start Young and Keep It Simple
Once your kids are old enough to know they shouldn’t be sticking pennies in their mouths, you should introduce them to coins and cash. A two- or three-year-old faced with a choice between a penny, dime, and nickel will almost always choose the nickel because of its size. They will not understand the value of money at this age, but as part of the many craft games they play, they might be able to trace and color various coins and learn their names. This is great for grandparents who could help fill the piggy bank.
Once they have a sense of coins, you can begin to play store with them. The imaginary shop in your living room where they can buy and sell any items at their disposal. It’s an excellent way for them to exercise their imagination, and the exchange of coins for a toy teaches the basics of commerce and value. You can make pretend money and shop till you drop or at least naptime.
At some point, they will be ready for the “real store.” Ask your preschooler to clip some coupons with you. At the store, give them the coupons and ask them to help you find the items. In addition to improving their self-esteem as a “helper,” it’s a fun way to introduce the concept of saving money.
Many realize there is much uncertainty when taking young children to a restaurant. I’m sure they would prefer to play “imaginary restaurant” at mealtime and introduce table setting and serving skills, with good manners and making change to pay the bill or leaving a tip as a fun learning experience. Their involvement in the meal process will undoubtedly take some patience, but if planned well, it can be fascinating for the children.
The Golden Rule
One fundamental money rule that I preach to many of my adult clients is, “Spend some, save some, and give some away!” I can only imagine the impact that could be made if more people followed this mantra from a young age.
Your child’s first inclination will probably be to spend their money. Why? Because that’s what they usually see you do, especially if you spend on things for them. They do not see you funding a 401k or transferring money to a donor-advised fund, so it’s essential that you introduce the concepts of saving money and giving some away.
We know that a piggy bank or money jar is a way for children to see the money they have put away. And for those overachievers, the premise of an ever-growing amount of money becomes their goal. Unfortunately, some of our clients maintain the same goal, and it isn’t easy later in life to persuade them that their money is a means to an end and not the end itself.
For children, discuss some short-term goals they would like to achieve. Maybe it’s a special toy or game. It could be an event to experience, like a ball game or a visit to the local virtual reality shop. Not only have you introduced the actual use of money and the importance of saving, but you allowed them to sense “delayed gratification,” which will be one of the most important lessons learned when saving more significant amounts of money for longer-term future goals. They should realize, at a young age, that saving is a great habit that makes them feel good, both now and in their future. Consideration should be given to providing a “matching contribution” for added incentive, and to model your willingness to “give a little.”
“Giving a little” is the last aspect of our golden rule. Once again, having a separate “giving jar” helps identify a purposeful pool of money. It is the interaction with your children that passes on the all-important value of being charitable. Please speak with your children about what is important to them. Maybe it’s animals, dancing, sports, or any societal areas that could always use some support. Discuss ideas on how they would like to make things better, or what they would like to see happen. Make suggestions about how their “giving jar” could help. Involve them. Take them to see how they are helping, let them physically donate their money.
We often work with our philanthropically inclined clients to set up formal giving plans – being a bit more sophisticated than the “giving jar”. In all cases, we suggest that the giving vehicles involve their adult children, allowing them to participate in the decision-making both now and the future. It is an excellent conversation topic when sitting down at a large family dinner. Start young, and it will become a reality.
Earning is Learning
As your children grow, certainly when they are “double digits,” it’s time to allow them to have money of their own, so that they can learn how to use it. Introduce the “allowance.” We have all heard of it, probably all received it, but like many of the lessons put forward, the interaction and communication around it promotes the long-term value.
It is a safe assumption that people value the money they earn differently than the money they are given. Treating an allowance as payment for performing chores around the house should be used delicately. Some actions are the responsibility of being part of a sharing family. Yet there are some particular chores, especially ones that you would otherwise have to pay someone to do, that should be considered earnings.
As time goes on and the chores are more complex, children can become adept at “salary negotiation,” having a perception of the value of their work in a commercial sense. Too many workers in today’s society lack this skill in their current occupation.
For clients who are self-employed, hiring their children as employees is a very impactful tax strategy that we often recommend.
Leaving out the traditional lemonade stand idea, as we are at the edge of a pandemic, consider some of the following opportunities. Depending on your child’s age, you may need to help them with some of these ideas.
- Babysitting.
- Yard work for a neighbor.
- House and pet sit for vacationing neighbors.
- Sell crafts on a website, such as Etsy.
- Organize a yard or garage sale.
- Shovel driveways for neighbors in the winter.
- Do extra chores for money.
- Wash neighbors’ cars.
- Collect recyclables.
- Tutoring.
Confounding Compounding
Saving money is a great habit, but it is investing money that creates wealth. One of the fundamental principles of investing is the power of compounding. If something compounds – if a bit of growth serves as the fuel for future growth- a small starting base can lead to results so extraordinary they seem to defy logic. Warren Buffet had a skill as an investor, but his secret is time. $81.5 billion of his $84.5 billion net worth came after his 65th birthday!
If you follow a path of financial literacy with your children from an early age, it is likely they will realize that earning money from human capital or the “sweat of your brow” can get you only so far. When they learn about the power of financial capital, when your “money makes money,” they will want to participate.
Encourage your under-18-year-old child to open up a custodial account at one of the discount brokerage firms. Have essential discussions about the principles of investing. Teach them about the difference between a stock and a bond. Show examples of the power of compounding. Importantly, stress that there is an inextricable link between risk and reward, and the closely related aphorism, “there is no such thing as a free lunch.”
Allocate some of their savings to invest. Involve them as you did when teaching the value of charity. Let them pick stocks of companies they like. Many firms now allow trading in partial shares. Allow for dabbling in cryptocurrency, a sure-fire exposure to price volatility.
The financial services industry is looking toward Millennials (between 25 and 39 years old) as their next target market. Robo-advisors, low minimum trading levels, automated trading, and cell phone app access will draw this generation into the world of high finance.
Undoubtedly, the servicing of Generation Alpha (or Gen A), born between 2012 and 2025, is on the agenda of some forward-thinking firms. I hope you will take on the responsibility of providing some of the financial lessons and sound values outlined above. If you don’t, someone else will.
Do As I Say … And As I Do
As you reflect on your level of financial literacy and the specific behaviors learned as a child, undoubtedly, you can point to situations in your life that helped shape your current feelings about money. Maybe there were some good memories of having a lemonade stand, mowing lawns for extra cash, providing for a needy family, or saving up for that special “something.”
On the other hand, maybe the topic of money was a sore subject in the house. Friction and disagreements would frame the discussions, and self-worth is perceived as a comparison to something or someone else.
A discussion of the different money personalities is the subject of another essay, but it is essential to realize that, as important as the money lessons you teach to your kids are, what is equally important is the way you discuss and handle money when you are around them.
Beware of mixed messages like complaining about household spending, but then going on a shopping spree or taking a lavish vacation; or teaching that savings and delayed gratification are sound financial practices, all while the Amazon truck is in your driveway every day, including the weekends! We all could do well with some self-reflection to determine whether our financial habits serve our children well for the future.
If you want your children to develop good spending and saving habits, they need to see you making smart spending and saving choices. In short, practice what you preach. And preach with consistency. Educating your children about personal finance is a process that can take time, but if you put in the effort and continuously communicate a clear message about money, you will instill good habits that will serve your children well.
Please reach out to us if you would like to discuss and develop a plan for your family.